A Classic Tale of Losing Money in the Stock Market

Siddharth has recently started working in a Software company as a Data Analyst and over the past 6 months, he has accumulated 3 Lacs in savings which he intends to invest somewhere to book a good return.

He hears about the stock market from his colleague Naveen who invested 5 lacs in stocks last month and doubled his money within 3 hours via intraday trading. Suddenly Siddharth gets interested in the share market and can’t stop thinking about how Naveen doubled his money in just 3 Hours. That’s unbelievable!

He then gets into a zone where he thinks that if his colleague can book such high profits, why can’t he? Despite knowing nothing about the stock market and how it operates, Siddharth decides to enter the stock market with all his 3 Lacs saved up over the last 6 months through his hard work. Without doing any research and homework of his own, he invests all the money in some random stock according to his own choice.

This is where things start to go south for him. It’s easy to enter the stock market as it’s an open market. But, entering it without being prepared is nothing but stupidity.

With neither the skill nor the stock market acumen, Siddharth blindly followed the crowd and invested in a random company. Little did he know what he was signing up for.

He directly jumped into the avenue of Intraday trading and not long-term investing. The company he put his money in recently made its debut in the Stock market via an IPO of 2500 crores.

People are talking about that stock and it made lots of noise in the news too. But many people were following the herd mentality just like Siddharth without knowing that the company had multiple loopholes in its business model and its road to becoming profitable for all its stakeholders was uncertain. 

Siddharth was unaware of this since he did not do any research of his own.

Soon after he invested his money into that stock, he was in for a disaster. For the entire day since the market opened, the stock price kept going down and at the end of the day when markets closed, the stock price was down by 39%. Siddharth lost 39% of his money in just one day.

Why? Because he invested in FOMO (Fear of Missing Out).

Let’s dive deeper into a couple of reasons and understand why people like Siddharth lose money when taking the route of stock market investing and fall prey to uncountable pitfalls which make them not trust the stock market enough.

Lack of Adequate Research about the Company and Having a Herd Mentality.

The topmost reason why people lose money in the stock market is that they lack proper research about the company in which they intend to invest. They end up following the advice and tips of neighbors, friends, and family but do not consult any financial expert or do their research.

As a result, they end up investing in any company blindly under the influence of their known ones.

They Want to Make Quick Money.

People who have a mindset of making quick money are often vulnerable to situations where they might end up losing money in the stock market.

With the intent of doubling their capital in a short time span, they end up taking decisions that might not be in their best interests.

These kinds of people can be easily influenced by any financial advice channel and usually, they end up investing in risky stocks with not so strong foundations.

Instead of Having a long-term Investment Mindset, They Jump into the Lucrative Trap of Intraday Trading.

New investors who have just begun their journey in the stock market get influenced by the charm of Intraday trading without first knowing how it works or what can be the consequences of it if not done right. This short-term trading mindset exposes them to higher risk and is one of the most common reasons people lose money in the stock market.

They Hold on To the Losing Trade for a Long and Cut the Profitable Trade Early.

Newbie investors are the ones who make this mistake the most due to which they end up losing their invested capital in the stock market. They usually have pre-made notions in their mind and their fear of losing money makes them not take the right decisions.

They often lack confidence in their executed trades because of not doing adequate homework. Speaking specifically, they do not do an in-depth evaluation of the risk to reward ratio and end up doing poor risk management for their invested capital.

Usually, they hang on to the losing trade in the hope that they will make a profit but often end up not doing so. They do not understand the importance of having a stop-loss at the right time and place which makes them vulnerable to losing money.

Impatience in Retail Investors Makes Them More Susceptible to Losses.

The generation of today especially the Millennials and Gen Z, are not ready to give time to the stock market. They operate under the mindset of growing their invested capital as quickly as possible.

One of the most important aspects of reducing the losses in the stock market is to master the art of putting stop losses and maximizing the profits.

But many people are in such a rush to book profits that they make their trading and investment decisions in a hurry and often end up going in a downward trajectory.

They Overdiversify their investments in the Stock Market.

Diversifying your funds in the stock market is highly suggested and is a wise strategy to make consistent profits. But when retail investors end up over-diversifying it in an uncontrolled manner, it increases their probability of getting into the trap of losses.

Lack of Discipline is Another Reason Why People Lose money in the Stock Market

Discipline is important when you set foot in the stock market to grow your money. But when you do not follow a systematic investment plan and do not have clearly defined goals, you will not be able to achieve financial growth via investments in the stock market.

Once you make a profit, you need to make a strategy regarding how to use those profits to grow your finances further. The majority of people get greedy and do not follow a disciplined approach to investing in stocks.

Never Invest Emotionally. Emotionally Guided Stock Investment decisions always lead to Loses.

Many people invest emotionally in the stock market. The most common of them are fear and greed. When these two emotions take the front row seat for a retail investor, they start putting logic and fundamentals to the backseat and end up making poor investment decisions.

Stock market Investors who are least concerned about basic financial concepts, and always let their emotions come in the way of their investment decisions will always end up losing money because of their rash decisions.